Eight common financial mistakes in a divorce

The names in these examples are not real but are used to reinforce the point that the stories are taken from real life divorce. The examples were originally developed for use in study materials for an adult education program in financial planning at Delaware Valley University in the early 1990s. Over the years I have found value is referring to these examples of strategy by reference to the fictitious names. The data and amount used in the stories are historically accurate, although some of the cases are many years old so the dollar amounts may seem distorted now.

1) Out-of-control legal battle

Patricia came to me late in the divorce process and did not seem shocked that her legal bill was already over $50,000 although she had paid only about $7,000 so far. They still had a long way to go and the divorce was not near settlement. She admitted to a desire to “get even” with her spouse and fought with him on every legal issue. Eventually her legal bill climbed to almost $175,000. She presumed that the bill would be paid with liquidated assets from her spouse’s investments at the time of the marital settlement. It was not. In the end, her settlement included only her house worth $260,000 with $125,000 equity. She was pressured to sell the house in order to pay her legal bill, leaving her without a home and after paying the home sale costs, hardly enough money to restart a new life.

2) The passive spouse

Bonnie let her husband, an attorney, take the lead in handling the legal issues of the divorce, trusting him and her attorney to get the job done. There were no significant disputes in this divorce but rather it was just a matter of working out the details on paper. Bonnie and her husband are effectively co-parenting and even continue to have close personal conversations during their separation. But Bonnie did not feel comfortable discussing her divorce issues with her husband, and he did not feel that it was appropriate since she was represented by an attorney. Neither the husband nor her attorney had any incentive to resolve the matter quickly or efficiently so more than 4 ½ years later and thousands of dollars in legal fees in debt, the divorce is still not finalized. Bonnie says that she now has trouble finding men who are serious about dating her because she seems unable to tie up loose ends from the past. She does not even have an idea of the cost of the divorce or a prediction as to when the divorce will be complete.

3) Failure to consider effect of debt payments

Tim had a lower income than his wife but this had not been an issue during their marriage because they pooled their income to easily cover all expenses. Tim and his wife split their assets peacefully and equally according to who used them most. Tim got the boat, the truck, the shore house and a modest investment account. Altogether these were worth $340,000 the debt payments totaled $185,000 and fixed payments cost more than $2,000 per month. This was more than he could afford on his modest salary of about $4,000 per month. She got the primary home worth $200,000 but with only a small $35,000 mortgage. Although the equity was split evenly ($165,000 each) Tim was unable to maintain the debt payments without help from his wife’s income. He soon depleted the investment account and was forced to sell the car, the boat and eventually the shore house.

4) Additional risks for self-employed

Under the advice of her attorney, Sally filed a petition to have the court determine child support payments from her husband. Her husband was self-employed and the family court clerk was not trained to interpret the complicated financial statements from his business. The court misconstrued their financial statements and the couple’ s tax returns and entered a judgment for an amount greater than the husband’s actual income. At first Sally was thrilled at winning such a large award from the court but the support checks were never as much as the court award. Eventually the husband wound up in jail for inability to pay and then her support checks stopped completely. By now he had lost his business under the stress of the situation, their child missed seeing her father, and Sally had no monthly child support. Finally she realized the insanity of this situation and she sat down with her husband to negotiate a fair amount of $1200 per month. They promised to work out all future differences between themselves rather than rely on the court.

5) Blame the attorney

James hired an attorney years ago who requested a $2,000 retainer. James was unfamiliar with the legal process but assumed that retainer he paid would be the bulk of the cost of the divorce. Before the motion for divorce was filed the attorney requested another $5,000 payment based on more time-consuming issues. James was unable to pay and simply abandoned the divorce. He has a poor impression of the legal profession. As far as I know, he is still married after a decade of living apart from his spouse and unwilling to consider working through the financial requirements of the divorce process.

6) Playing the victim

Vicky, a realtor, told me at our first meeting that she insisted that nothing in her life should change because of the divorce (except to remove the man). She was clear in her opinion that he divorce was entirely his fault and his decision. She expected to stay in the same house, maintain the same lifestyle, keep up her same activity schedule (that included more manicure appointments than real estate appointments). She had already fired an attorney who had failed to deliver a support order in the amount she expected. Her second attorney appeared to be moving very slowly and keeping a tight lip. She was not open to a discussion that divorce requires changes and sacrifices from each spouse. Ultimately I decided to not take Vicky as a client both because she failed to see the need to change and because she had a pattern of acting illogically in financial decisions. Vicky was not open to coaching at this point.

7) Emotional breakdown

At their final marriage counseling session, Jim and Sue realized that a divorce was inevitable. The therapist suggested that they consider a peaceful mediation, and they agreed that would be best. They still loved each other and did not want to cause pain or add any further to the suffering that they were already feeling. They recognized that a peaceful split would be easier on the kids and save money for the whole family. But within a few days Sue’s sister had convinced her that she could not get a fair deal without a powerful attorney in her corner and Jim began to feel resentful about the events that led up to the decision to divorce. He felt like he was now ready for a fight to get even for having been victimized in his marriage. Soon both had their own attorneys and a full-scale divorce battle was underway.

8) Nonprofit work

During most of their 12 year marriage Sal was a director of Big Brothers/Big Sisters. Although his pay was small compared to his former job as a public accountant, he loved the work. His wife worked full time before, but was now a stay-at-home mom with their second child. Sal was unaware that the court would order support payments based on his potential income rather than his actual income. Sal is a committed father but carries bitter feelings about the need to support his ex-wife and child at what he considers an “extravagant” lifestyle. He cites the fact that his ex-wife drives a new car while his old car barely runs. He lives in a dumpy apartment where he is embarrassed to bring any friends. He struggles to make the monthly support payments, and lives under constant financial stress. But Sal refuses to give up the only thing in his life that he finds completely rewarding.

While every couple’ s divorce is different, it is possible for those going through a divorce today to learn from the common patterns of behavior and mistakes of others who have learned these lessons the hard way.

About the Adviser – Tony Novak, CPA, MBA, MT, has over 25 years experience as an independent financial adviser and is a UAHC-trained volunteer couples group discussion leader, college instructor in financial planning,  accredited instructor for continuing education for accountants, attorneys and financial advisers, and one of eight advisers selected by the publishers of Financial Planning as moderator of the largest national online forum for financial advisers. Perhaps more important than professional credentials, Novak’s former life partner is a collaborative divorce attorney. This relationship ended amicably and successfully in 2004. He is now remarried and making it work for the past nine year through often difficult financial circumstances. Novak’s articles on personal financial planning strategies appear in dozens of magazines and newspapers.


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